Monday, February 1, 2010

NO! To floating money market share values!

In The Financial Times of January 28 ('Markets & Investing' section, page 23) - about a third of the way down the page - there appeared a nondescript four column story under the header: 'Curbs on Money Market Funds'. As readers may be well aware, at the apex of the credit meltdown and banking crisis there was a veritable flood of investors toward safety, after seeing their investments in equities cratered. The first destination was money market funds, which are also the safest instruments available for most people with IRA or 401k holdings.

As risk enhanced, a sizeable proportion of these people then attempted to pull their cash out of money markets - leading to a near literal run on them, and causing at least one to "break the buck". For those who may not be aware, all money market funds trade at $1 share prices. The aim of all major fund companies (e.g. T. Rowe Price) is to maintain this parity. A fall below that means investors in the money market are losing money. (For example, in the case of the fund that "broke the buck" - the share price went down nearly two cents to 0.98. Thus, say for a person that may have held $100,000 there, the holdings subsequent were $98,000 - marking a $2,000 loss in what is purported to be an ultra-safe investment).

Why would people place most funds there? Mainly because within 5 years (or less) of retiring they don't want to risk their life savings (mainly tied up in their 401ks) in the equity -stock casino. The market meltdown of 2008, with so many losing up to 40% of their nest eggs, showed the wisdom of the conservative approach. Interestingly, the usual stock hawks in MONEY magazine, in a number of issues in the wake of the meltdown, for once concurred that saving money over time was preferable to trying to make up for not doing so by gambling in the stock market. Hoping to strike one big Bull Market run and high P-E ratio upswing and earn a return equal to all the hundreds of thousands that they ought to have saved in the first place.

Thus, those electing money market choices (which disdain also bond funds - since they can be littered with "toxic waste" - like collateralized mortgage obligations, IOS strips and inverse floaters) expect to preserve their principal and not lose it. Those who suffered the breaking of the buck, lost. Not a lot, but enough to savage confidence.

Now, according to the FT article, the SEC voted to require money market funds (which currently hold $3.24 trillion in assets) to disclose fluctuations around their standard share price of $1.00. This is further to be done on a monthly basis, with a 60-day lag. Implicit here is the demand to disclose what can be called the "shadow net asset value as manifested in any fluctuating share prices. The whole idea is to inform money market investors of any volatility in their holdings, which may not always be apparent to them from the Prospectus.

This is a good idea, make no mistake. Investors, especially conservative oldsters in money markets (where the bulk of their 401k money inheres) deserve to see any threats before their bucks are actually broken. So, kudos to the SEC on that!

Not so appealing is what the FT article also pointed out:

"The SEC is also to evaluate the merits of requiring a floating net asset value for money market funds rather than the stable $1 mark. Such action would involve substantial changes to the money market fund industry."

But WHY do that? This introduces the very element of phantom or variable asset value (that exists in stock holdings) to now intrude into the "safe" money sphere. It also markedly lets money market fund companies and managers off the hook, since if the share value is permitted to float, there will simply not be the same committment to adhere to the $1 value at all. Why not let it drop 5 cents, 10 cents? "It's heading south! Hell, let it! The SEC says we can do some floats!"

The victim is the money market fund holder- especially since money market funds are about the only safe (e.g. relatively fixed income) option afforded in most IRAs and 401ks. So, if floating share prices is now allowed, the money market investor may lose as much (theoretically) as if he were invested in certan "balanced" mutual funds, or index funds. Now sure, the float could also go upward, rewarding the investor, but once any variable share value emerges then we have speculation and propensity for market timing.

Obviously, money market investors will attempt to play it so they cash out at the highest floated share price, not the lowest. This then introduces the same sort of gamesmanship that occurs in the Wall Street stock casino. Even if money market fund managers and owners prohibit cashout until one actually needs to do RMDs (to satisfy the IRS age 70 1/2 requirement) - the losers will be those who have to withdraw when the floats are lowest value.

It is much fairer to ALL money market investors to keep the $1 share price as the standard, and thereby not turn the immense money market sphere into another speculation domain - to the detriment of all cautious savers- who may need all the money they can muster to live off a lifetime income stream via annuities. They chose not to speculate in the stock market, and they shouldn't now be compelled to do so in money markets. SEC, take note!

About Me

Specialized in space physics and solar physics, developed first astronomy curriculum for Caribbean secondary schools, has written twelve books - the most recent: Modern Physics: Notes, Problems and Solutions; and earlier,: BEYOND ATHEISM, BEYOND GOD, ;Astronomy & Astrophysics: Notes, Problems and Solutions', 'Physics Notes for Advanced Level&#39, Mathematical Excursions in Brane Space, Selected Analyses in Solar Flare Plasma Dynamics; and 'A History of Caribbean Secondary School Astronomy'. It details the background to my development and implementation of the first ever astronomy curriculum for secondary schools in the Caribbean.